The Economy’s Weekly Recap

5/24/24 - 5/31/24

Raymond Lin

Apologies for the much belated newsletter, I was on a trip recently and was unfortunately unable to write last week’s edition of the newsletter. As a result, I only completed last week’s newsletter midway through this week and felt that it would be appropriate to release it concurrently with this week’s newsletter rather than have an awkward midweek edition. I hope the newsletter nonetheless remains educational and relevant though. - Raymond Lin

This Week’s Prominent Events

The Oil Industry’s Consolidation

• As we’ve all seen in the last year or so, oil prices have been quite elevated, which has contributed to massive profits for oil companies. These profits have granted oil companies the breathing room and initiative to make major M&A deals to consolidate their position in the oil industry, such as with ExxonMobil’s $60 billion acquisition of Pioneer Natural Resources and Chevron’s $53 billion acquisition of Hess. In total, 2023 saw 

• A recent addition to this oil consolidation has been ConocoPhillips’s $22.5 billion all stock acquisition of Marathon Oil, which is a premium of around 15% compared to Marathon’s valuation before the announcement. ConocoPhillips projects saving $500 million in the first year of the deal closing, which is expected to be in Q4 2024 barring any major regulatory scrutiny. ConocoPhillips’ CEO Ryan Lance has said that the deal is a “very, very small percentage of that global market”, suggesting the FTC is unlikely to pursue any regulatory action.

• Along with this announcement, ConocoPhillips announced it would be raising its dividend by 34% at the end of 2024 and will purchase $20 billion of its shares over the next 3 years, repurchasing the shares used to acquire Marathon Oil.

Retail Price Cuts

• Since 2022, inflation has severely impacted consumers, driving the price of products up. While consumer demand continued to grow initially due to things like pandemic funds, it has since stalled as consumers are faced with unfavorable prices. 

• This decrease in consumer spending has led retailers to change tack to re-attract consumers. Just last week, Walgreens, which has more than 9,000 stores and serves almost 9 million people daily, announced it would be slashing prices on 1,300 items. Walgreens Chief Customer Officer Tracey Brown said “Walgreens understands our customers are under financial strain and struggle to purchase everyday essentials”, adding that Walgreens had been lowering prices since October 2023. 

• Some price cuts that were highlighted by the company are…

  • 80-count gummy vitamins going from $13.49 to $11.99

  • A bag of sour cream and onion potato chips decreasing from $2.79 to $1.99

  • 16-inch Squishmallow plushes lowering from $24.99 to $20.00

• Walgreens’ price cut comes in the wake of similar actions by other retailers like Target, Amazon Fresh, and Walmart as well as companies like McDonald’s and Applebee’s. Despite these price slashes though, inflation remains quite high, with CPI inflation remaining persistent in recent months. Hopefully, this reduction in prices will benefit consumers and improve these company’s sales. 

A Cellular Acquisition 

• The cell service industry has been heavily dominated by a few key players for much of its recent past, with T-Mobile's $26.5 billion takeover of Sprint in 2020 further consolidating the industry into the hands of just 3 major players: Verizon, T-Mobile, and AT&T. 

• T Mobile has furthered this trend recently by acquiring most of U.S. Cellular, a regional cell service company, for $4.4 billion. Of this $4.4 billion, T-Mobile will pay $2 billion in cash and assume $2.4 billion of debt. From this deal, T Mobile will get 4 million customers, particularly rural customers, and 30% of US Cellular’s spectrum assets. These spectrum assets are coveted because they give a company the right to use certain frequencies that can give greater capacity and speed to cellular networks. 

• While the deal is expected to close in mid 2025, it could take longer. Regulatory scrutiny regarding cellular networks is intense, especially when spectrum assets are for sale. When comparing this acquisition to the much simpler acquisition of Mint Mobile, which still took 13 months, it is possible the acquisition could be stalled or blocked. 

AI Frenzy

• Much hype has been generated surrounding AI in the last two years as stunning AI products and hopeful investor dreams have emerged. This can be most obviously seen in the funding and valuation of AI companies, such as OpenAI or Anthropic. However, it seems another entry should be added to this list as xAI, which was founded by Elon Musk and focuses on the development of AI via services like its chatbot Grok, raised $6 billion in a Series B funding round. 

• This funding round valued xAI at $24 billion, with some notable investors being Sequoia Capital, Fidelity Management & Research, Andreessen Horowitz, etc. However, much is still uncertain about the company as it is very new, only being founded in 2023. This puts it behind its competitors significantly in terms of expertise and direction, which could hinder its success. 

• However, its link to Tesla and X(formerly Twitter) via Elon Musk has led some to believe that some of their AI advancements could be used to support the development of xAI. Nonetheless, xAI’s funding round serves to show how an AI frenzy has overtaken the financial world in recent times, and it will be an important thing to watch as AI becomes an increasingly important part of corporations and the broader economy.

A Federal Tax Software

• Private tax filing companies have dominated the tax system in America for many years now, but a recent challenge to this has come from the government: Direct File. Earlier this year, the IRS introduced a limited 12 state pilot version of Direct File, a software that helps taxpayers file their taxes for free, for select individuals with simple tax information, with more than 140,000 Americans using it. The software was seen by users as easy to use but was also seen as challenging the position of private tax filing companies. David Ransom, a lawyer who represents the tax software industry group American Coalition for Taxpayer Rights, said that “[t]here’s not a real demand there for this” and that the effort was a “political push”. 

• Seeming to ignore this corporate response, the IRS has moved forward with its plan to expand Direct File by asking all 50 states and the District of Columbia to help taxpayers use a new federal tax filing system called Direct File. This further expansion, assuming continued efforts to improve the software to accommodate more Americans, could lead to better taxpayer experiences as expensive and unnecessary middlemen are cut out of the equation and Americans keep more of their money. 

• However, some companies have continued to criticize the effort. Derrick Plummer, a spokesperson for the tax preparation company Intuit, said “every American can already file their taxes for free, without any cost to the government or taxpayers”, referring to the IRS’ Free File Program. The Free File Program is a public-private partnership that allows individuals whose income is less than $79,000 to file taxes for free, but it is done through private companies like Intuit. The new Direct File is done solely through the government. 

• Unfortunately for Direct File proponents though, its success may be limited by November's elections. Republicans have been keen on reducing the scale of the IRS, including a $1.4 billion reduction to IRS funding in last year’s budget cuts. A Trump victory in 2024 could see the IRS’ plans inhibited.

Future Events

US Q1 GDP Revision

• To battle inflation, high interest rates have been around for the last two years. But, despite the negative effect high interest rates have on the economy, the economy has been surprisingly resilient. Unemployment has been low, jobs have been added, and economic growth has been high, especially when compared to other parts of the world. 

• However, recent GDP figures seem to suggest that interest rates have had their intended effect as the Commerce Department revised the GDP growth for Q1 down from an annualized rate of 1.6% to a sluggish 1.3%. For reference, Q4 2023’s growth rate was 3.4%.

• This decline in GDP growth, from both Q4 and the original figure, may seem to be something to be worried about as it could show slowing growth. After all, not only did GDP grow slower than initially believed, but so did consumer spending, which makes up 70% of the US economy and which was revised down from 2.5% to just 2%. Spending on appliances and furniture fell 1.9% when annualized. 

• Despite this potential for economic decline, there are signs that this decline in GDP growth is nothing to worry about. Service spending rose 3.9% and so did business investment in areas like housing, software, and research. Another comforting fact about the GDP revision is that a significant portion of it is due to temporary factors.

• In Q1, there was a surge in imports and a decline in business inventories, which are factors that fluctuate every quarter. In Q1, their fluctuation caused a combined subtracted 1.5% in GDP growth, but this fluctuation is a temporary one and it’s likely the economy is doing fine. When considering the battle with inflation, this slowing growth may be a good sign as weaker economic growth could lower inflation.

The Beige Book

• Every 8 months, the Federal Reserve releases a report called the Summary of Commentary on Current Economic Conditions, but it is informally known as the Beige Book. The Beige Book essentially compiles data from the 12 district banks for the Federal Reserve to use when making decisions. It includes information about local employment, economic growth, concerns of businesses, and more through interviews and data. 

• The Beige Book’s May version was released recently, and it serves to confirm some of the developments already mentioned in this week’s newsletter. Here are some of its revelations…

  • Economic activity expanded but not equally as it varied across industries and Federal Reserve districts. Most Federal Reserve districts did report slight or modest growth, but two reported no change, supporting the information about the revision in the prior story.

  • Businesses felt pessimistic due to rising uncertainty in the economy, especially regarding consumer demand as consumers pull back spending. In response, several Federal Reserve business contacts said they were pushing back against additional price increases, suggesting the price cuts by Target are not an isolated event.

• Overall, the Beige Book serves to confirm some of the sentiments that have emerged recently, and it also supports several of the conclusions drawn by Phi Fiscal. 

April’s PCE Inflation

• Often, Phi Fiscal, along with many other prominent news organizations, focuses on CPI inflation as the main indicator of inflation. However, another important indicator that is actually preferred by the Federal Reserve is the Personal Consumption Expenditures(PCE) price index. PCE is different from CPI in that it tracks different products for different consumers using different mathematical formulas, with PCE often having a wider scope and different weighting for goods. 

• Since it is used by the Federal Reserve and is a generally useful source for understanding the economy, its recent release should be inspected. In April, PCE rose 0.3% monthly and 2.7% year over year while core PCE, which like Core CPI removes volatile goods like food and energy, rose 0.2% monthly and 2.8% yearly. 

• These figures suggest a similar story to CPI over the last few months: inflation remains stubborn. However, there is a silver lining of sorts, at least inflation wise. Consumer spending, which as mentioned before drives 70% of the economy and contributes to inflation, cooled in April, rising just 0.2% compared to 0.7% in March. Disposable income grew slower too at just 0.2% versus March’s 0.5%. This trend, if it continues, highlights that consumer demand and economic growth are slowing, a good sign for inflation. 

Weekly Question

Which of the following is the smallest oil company by revenue?

• A: ExxonMobil

• B: Chevron

• C: Saudi Aramco

• D: PetroChina

Answer: Chevron. It is significantly smaller than its peers at just $227.1 billion in revenue compared to ExxonMobil’s $386.8 billion, PetroChina’s $486.4 billion, and Saudi Aramco’s  $590.3 billion.